Expert: Hangover May Follow Buying Binge

December 22, 1985|By Cox News Service

WASHINGTON — Consumers have spent with such enthusiasm for the last several years that installment debt has reached record levels. Although most economists think an end to the buying binge is imminent, they are hesitant to suggest that when spending drops off, it will trigger major disruptions in the economy.

Still, because consumer spending accounts for a whopping two-thirds of the gross national product, virtually every economic forecasting group is predicting a slower rate of economic growth in 1986 because of the high level of installment debt.

And when such elements as weak agricultural and manufacturing sectors, a massive drop in federal spending as a result of the Gramm-Rudman balanced budget mandate and a huge international trade deficit are factored in, a severe change in consumer buying habits could be reason for alarm.

''I'm scared,'' said Georgia State University economist Donald Ratajczak in Atlanta. ''We can explain away the current consumer debt, but it's still high. You still have to say 19.2 percent of disposable income is already committed to installment debt . . . and we're talking about installment debt before we go into mortgages.''

''There are households out there that have already committed 60 percent of their income to meeting these debts,'' he continued. ''They're not going to go out and buy any more. If they are, somebody's crazy to lend them any more money.''

Delinquency rates on installment debt are starting to creep up, but most economists still consider them to be at a manageable level. Mortgage delinquency rates are higher, but economists say this is more a reflection of a speculative investment gone wrong than an indication that Americans are deeply in debt.

''A lot of people bought homes as a speculative investment based on the inflation of the 1970s when home prices went up dramatically. They thought the same thing was going to happen in the 1980s, and it didn't so they defaulted,'' said Barry Bosworth, an economist with the Brookings Institution and a chairman of the Council of Economic Advisers during the Carter presidency.

''People thought they were going to get a great investment. They bet inflation was going to continue, and it didn't, so don't determine the rise in default rates as symptomatic of overextension by consumers,'' Bosworth said.

Also, economists point out, much of the recent surge in installment debt is attributed to the lucrative auto financing deals offered by American automakers in the late summer. Finance rates were so low that many people bought cars they otherwise wouldn't have purchased or bought more expensive cars than they otherwise would have considered.

''Something like 70 percent of that growth boom was for auto loans,'' said Sandra Shaber of Chase Econometrics. ''In October, when car sales plunged, new auto loans slowed to about half the rate of the month before, and other key areas of consumer borrowing slowed as well.''

In September, the level of consumer installment debt as reported by the Federal Reserve Board rose by $11.5 billion. But in October that figure dropped to $6.6 billion, said Joe Coyne, a spokesman for the Fed.

''You can anticipate that, since so many cars were sold in September, it probably will eat into the near future, too, because people bought now instead of later,'' Coyne said. ''It's no cause for alarm. You may see slower auto sales, but we've seen slower auto sales before.''

Nevertheless, a person who bought a car he hadn't planned on buying or a family that bought a more expensive car than it otherwise would have, considered simply, will have less money to spend on other things. And because household incomes are not rising nearly as fast as the debt, something has to give.

''Consumer spending is due for a very sharp slowdown -- not a collapse but certainly a sharp slowdown,'' said Shaber.

Traditionally, consumer buying runs in cycles, going down in periods of recessions and exploding when the lean times are over. The latest boom in consumer buying began after November 1982, the low point of the last recession, and has continued along at a healthy pace through 37 straight months of recovery.

In the past, consumers have handled debt well. They built it up to a high level, then brought the balances down to more manageable levels before they started buying again. But the most recent debt record is regarded as a little less predictable because it appears to reflect some fundamental changes in consumer buying habits and lifestyles as well.

In the first place, the easy availability of credit cards and bank cards has offered young Americans a chance to do things their parents never would have considered.

''Americans are increasingly over time relying on debt to finance durable goods purchases,'' said Bosworth of the Brookings Institution. ''We buy the good first and then save to pay for it. Years ago, we used to save and then buy it, so we've changed the time pattern of our saving. That does not imply Americans save less than they used to, they just save at a different point than they used to.''

''What we're doing is postponing saving later into life,'' Bosworth continued. ''But over a person's lifetime, they do successfully repay the debt, and in general, most Americans are able to handle it. It's a lifestyle change. People aren't as willing to wait.''

Ratajczak, who calls himself ''old fashioned,'' finds the change in buying patterns unsettling because it rules out the old concept of saving for a rainy day.